Call Options
Why does an investor who is short stock purchase a call option?
Short stock + long call = protective call. Limits unlimited loss risk.
Complete Analysis & Legal Rationale
A short seller faces unlimited loss potential if the stock rises. Buying a call option caps the maximum loss at the strike price minus the short sale price plus the premium paid. The call acts as insurance, guaranteeing the ability to buy shares at the strike price.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Does not match the governing concept in the explanation.
Does not match the governing concept in the explanation.
Matches the verified teaching point in the explanation.
Does not match the governing concept in the explanation.
Official Standard: Outline-level citation pending rule-specific upgrade. Verify against current FINRA materials.